August 1982, Part II
Brian Trumbore
President/Editor, StocksandNews.com

With the 25th anniversary of the market low for the Dow Jones industrial average at hand, Aug. 12, 1982, we continue our story of the background behind this historic occasion; accessing the archives of the New York Times for an overview and, perhaps, a nugget or two that could come in handy as you manage your own portfolios down the road.

To refresh your memory, I'll repeat the numbers from last time.

Fri. July 30, 1982?Dow Jones Industrial Average closed at 808.

Aug. 2?822
Aug. 3?816
Aug. 4?803
Aug. 5?795
Aug. 6?784

Aug. 9?..780
Aug. 10?779
Aug. 11?777
Aug. 12?776*
Aug. 13?788

Aug. 16?792
Aug. 17?831
Aug. 18?829
Aug. 19?838
Aug. 20?869

Aug. 23?.891
Aug. 31?.901
Sept. 30?.896
Oct. 11?1012
Oct. 29?..991
Nov. 30?1039
Dec. 31?1046

Last week I wrote of the bottom. Continuing, we look at the initial stages of the rally.

Aug. 14?reported by Alexander R. Hammer

"The stock market broke its eight-session losing streak yesterday, as the Dow Jones industrial average surged 11.13 points, to 788.05, mostly on investors' hopes for lower interest rates.

" 'The market was stimulated today by the sharp rally in bond prices, hopes that the discount rate would be lowered and by President Reagan's statement that the recession has bottomed,' said Charles Jensen, chief technical analyst of the MKI Securities Corporation.

"After the close of trading, the Federal Reserve did cut its discount rate, the rate at which it lends to banks and other financial institutions, to 10 ? percent from 11 percent. Within minutes, several major banks lowered their prime rate too, to 14 ? percent from 15."

[Ed. As I mentioned last time, Gulf Oil pulled its bid for Cities Service Company (Citgo) Aug. 6; for the record, after the close on Aug. 13, Occidental Petroleum made a $50-a-share offer for Cities Service, with the latter having closed at 33 ? on 8/13 before trading was halted.]

Aug. 14?reported by Thomas J. Lueck

"The Federal Reserve Board yesterday lowered the interest rate that it charges for loans to banks and financial institutions by one-half percentage point in another effort to encourage lower interest rates and stimulate the economy.

"The reduction in the Federal Reserve's discount rate, to 10 ? percent from 11 percent, was the third half-point cut in six weeks, and resulted in the lowest charge in nearly two years.

" 'The Fed is setting a clear policy of being more accommodative and injecting more reserves into the economy,' said Jeffrey Leeds, money market analyst for the Chemical Bank?.

"The prime rate?had declined from 16 ? percent in mid-June to 15 percent in the first two weeks of August?.

"The latest reductions in both the prime and the discount rates were clear signs that the cost of money has continued to fall in recent weeks, particularly the important Federal funds rate?.The funds rate stood at 10.25 percent yesterday, down from the 14 percent level in June?.

"The Federal Reserve's reduction in its key lending rate?came two weeks after it lowered the rate to 11 percent from 11 ? percent, and 24 days after it made a half-point cut to 11 ? percent.

"As it has in the two recent reductions in the discount rate, the Federal Reserve yesterday said its action was prompted by the modest growth in the money supply in recent weeks, which has given the central bank leeway to ease up on a tight money policy that kept interest rates relatively high by limiting the amount of bank credit available for private and government borrowing.

"Economists and money market analysts said yesterday's drop in the discount rate confirmed a growing belief that the Fed has now made stimulating the economy a high priority."

Aug. 14?reported by William G. Shepherd Jr.

"The last leg of a bear market is often crushing - a swift plunge in stock prices on heavy volume that pounds small investors and institutions alike, leaving them with big losses and shattered emotions. The effect can be cathartic. But in the vacuum that remains, investors can begin rebuilding their confidence.

"That last leg is exactly where the stock market now seems to be heading. Indeed, it is hard to find anyone on Wall Street these days who does not believe, or at least suspect, that the bear market is moving into some sort of climactic phase that will purge the investment community of its pent-up fears of economic collapse.

"In the past two weeks, all the market averages have plunged to new lows as Wall Street, beset by cruel economic news from all sides, has time after time been unable to mount a sustained rally. That is a discouraging omen, an indication that the bottom has not been reached, many securities analysts say, and a sign that even the most steel-willed optimists may be about to throw in their towels.

" 'The market's going to take the ultimate dive to culmination in the next few weeks,' said James L. Freeman, director of research at the First Boston Corporation. 'Batten down the hatches.'"

[Ed. Ah, Mr. Freeman? We just hit the bottom.]

"Though the consensus is that the market is in for a tailspin, there is no clear idea on how to play it and confusion seems to be the order of the day. 'Nobody can tell if we're starting a depression or ending one,' said a mutual fund manager who asked to remain anonymous. 'The market is one giant gamble.'

"Many bulls - while they concede that a sharp decline is likely - are acting on the longer-term assumption that a boom is coming on the other side. They are determined 'to tough it out,' said Robert J. Farrell, chief market analyst at Merrill Lynch?

"It is just that group of optimists, Mr. Farrell said, that must be driven to sell before the market hits bottom. Mr. Farrell calls it a 'capitulation' phase - a time when everybody simply gives up. 'It doesn't have to be a lot of screaming and 100-million-share days,' he said. 'It can be a disinterest in stocks and a preference for something else.' As Mr. Farrell figures it, a final sell-off could come by November and maybe sooner.

"But a cardinal rule of the stock market is that what most people expect usually does not happen. In 1974, when panic selling was widely anticipated, one of the longest and most severe bear markets ended in more of a whimper. The last leg of the bear market was spread in relatively orderly fashion over nearly three months. The worst market debacles - in 1929, 1962, and to a lesser extent in 1970 - have always been those that caught investors off guard.

"The most recent example of expectations betrayed has been the market's failure to react to declining interest rates. Throughout the spring and the first part of the summer, the prevailing wisdom was that once rates began to come down stock prices would shoot up. Short-term rates did begin to come down in late July, and since then yields on three-month Treasury bills have dropped to 9.35 percent from 12.5 percent. But the market has continued its slide.

"This has utterly confounded the theorists. The more agile among them quickly concocted two explanations. One is that they meant long-term rates, which have not declined yet. The other explanation is that credit is actually tighter now because the jittery banks do not want to make any more bad loans.

"Barton M. Biggs, the portfolio strategist at Morgan Stanley & Company, is probably closer to the mark. 'I don't know what's going on,' Mr. Biggs said in an outburst of candor. 'The market's reading tea leaves.'

"Even more disorienting is what investors perceive to be the disarray in economic policy and the abandonment of economic leadership in Washington: The inability of anyone to cut the Federal budget, the flight of economic advisers from the Reagan Administration, and most recently, President Reagan's sudden repudiation of his own tax cuts in favor of a $99 billion tax increase.

"The proposed tax increase is having an especially insidious effect. Bewitched by the implications of large budget deficits and high interest rates, Wall Street now has to worry about the proposed remedy, too.

"As if this were not enough, the market has been buffeted in recent weeks by a sobering series of economic developments:

"* The economic upturn is nowhere in sight. It did not appear in the second quarter of the year, as many people had hoped. It does not seem to be appearing in the third quarter, either. 'My analysts come back from visiting companies,' said John R. Groome, senior vice president in charge of equity research at the U.S. Trust Company, 'and everybody's despondent. No orders. No sign of an upturn.'

"* Corporate profits are continuing to slide, increasing the likelihood that companies will have to cut their dividends. A recent Standard & Poor's survey of 885 companies found that corporate earnings sank 16 percent in the second quarter following an 11 percent drop in the preceding three months.

"* Gulf's withdrawal of its bid for Cities Service - and the subsequent collapse in Cities Service shares - did not just produce huge losses for the professional arbitrage community; it also bashed thousands of amateur speculators and a number of brokerage firms that had risked their own capital in Cities Service stock. Coming on top of the public's withdrawal from the market during the past year, which dried up commission income, that blow has produced considerable alarm in the brokerage community?.

"* The trouble is spreading abroad. Following the mystery- drenched collapse of Italy's Banco Ambrosiano, Germany's mighty AEG-Telefunken suddenly declared bankruptcy. Meanwhile, the only rising stock markets left, in Japan and Britain, started falling - suggesting that the slump is becoming worldwide?.

"Considering all that has happened in the past months it is astonishing that the market has not fallen further. On average, bear markets since World War II have lasted 15 months, and stocks have lost roughly 25 percent of their market value. The current bear market is far longer in duration; now in its 21st month, it is only a few weeks from surpassing the 1973-74 debacle.

"But so far the decline has been comparatively shallow. The familiar Dow Jones average of 30 industrial blue chips, which peaked at 1030.98 in April 1981, is down only 24 percent. The broader-based indexes peaked late in November 1980, amid the euphoria following Ronald Reagan's election. They have fallen further, reflecting greater demolition among small stocks. The S&P 500 is down 27 percent?By contrast - although the recession was not nearly so brutal - prices in 1973-74 fell 47 percent.

"Some ways of looking at the market, however, suggest that it is on a par with the 1974 bottom. One yardstick is corporate earnings. When the Dow Jones industrials hit 577.60 in 1974, their price/earnings ratio was 5.8. Today, with the Dow 200 points higher, the P/E ratio is only 6.5.

Aug. 18?reported by Michael Quint

"High interest rates, which have stymied economic growth, broke sharply yesterday, sending the stock market in a burst of euphoria to its largest one-day gain in history. The volume of trading was the second largest on record.

"Bond prices also soared as hopes grew that a recent plunge in interest rates for Treasury bills and other short-term borrowings had spread to the long-term markets that finance job-creating investment in housing and new plants. The rate decline was attributed to the persistent recession and the prospect of shrinking demand for business loans?.

"The Dow Jones industrial average jumped 38.81 points, a record rise, to 831.24. Yesterday's volume of 92.86 million shares came within 20,000 shares of the record set in January 1981.

" 'Investors apparently are finally convinced that interest rates will now continue their recent decline,' said Michael Metz, vice president of Oppenheimer & Company.

" 'A continuous flow of bad news about the economy finally convinced people that rates will come down,' said George S. Johnston, president of Scudder, Stevens & Clark.

"In the market for short-term credit issues, Treasury bill rates fell about half a percentage point - to 8.1 percent for three-month bills and 9.7 percent for one-year bills.

"Traders said the surge in both the stock and bond markets was fed by a turnabout on the part of Henry Kaufman, the chief economist at Salomon Brothers, the investment banking concern. Mr. Kaufman was well known in the financial community for his predictions that interest rates would rise later this year.

"Yesterday, however, Mr. Kaufman said his earlier predictions would not come true because the weak economy would reduce business demand for credit, leaving more room for the Treasury to finance the still huge Federal budget deficits.

" 'A smart recovery in economic activity in the second half is not likely to materialize,' Mr. Kaufman said in what he called a 'fresh look' at the economy?.

" 'A lot of people are almost sycophantic followers of Kaufman,' said one trader in government bonds yesterday, 'and I would have to characterize today's activity as panic buying at almost any price.'

"Another trader explained that Mr. Kaufman and Albert Wojnilower, an economist at the First Boston Corporation who Monday changed his forecast to lower rates, 'both have tremendous psychological impact on this market.' The trader added, 'They have been more right than wrong for a few years now.'?.

"Mr. Kaufman said that yields on long-term Treasury issues might fall to 9 percent or 10 percent in the next 12 months, while the rate for Federal funds - overnight loans between banks - might fall to 6 percent or 7 percent."

Aug. 21?reported by Alexander R. Hammer

"The Dow Jones industrial average surged a further 30.72 points yesterday, finishing the session at 869.29?

" 'The raw power of this week's advance intensified today as stepped-upped buying from individuals and foreign investors joined the large institutions in further lifting stock prices,' said Robert H. Stovall, director of investment policy at Dean Witter Reynolds Inc?.

"For the week, the blue-chip average climbed a record 81.24 points. The previous record of 73.61 points was set in the week ended Oct. 11, 1974, on reports that the economy was beginning to recover."

Aug. 21?reported by Douglas Martin

" 'We are embarked on a huge bull market,' said Howard Winell, executive vice president of Bostian Research Associates, a New York financial analysis firm.

"The day began on an optimistic note as investors welcomed the passage by Congress of the $98.3 billion tax bill that President Reagan has said was necessary to reduce interest rates and insure economic recovery?.

"The net effect, analysts and industry officials said, appears to have been a lifting of the gloom that has clung to Wall Street for more than a year and a half?.

" 'It's a momentary outburst, not necessarily justified by the facts, of the strength of the American populace and industry,' John H. Gutfreund, chairman of Salomon Brothers, said."

Aug. 24?reported by Vartanig G. Vartan

"The stock market extended its strongest rally on record yesterday as the Dow Jones industrial average rose to an eight- month high?.

"The Dow Jones industrial average?rose 21.88 points, to 891.17?.

"Analysts said that if the market's remarkable performance continued, it would signal a recovery for the nation's slack economy for early in 1983. In the seven economic recoveries since World War II, a rebound in stock prices has preceded the start of a business expansion by anywhere from three to seven months. The average was six months.

"Most Wall Street professionals now believe that the stock market registered its low for this cycle on Aug. 12, when the Dow industrials reached a 27-month low at 776.92?.

" 'It was precisely the fear of an ominous recession ahead, along with recent strains in the nation's financial structure, that caused the Federal Reserve to encourage sharply lower interest rates,' said Howard J. Abner, chairman of Abner Herrman & Brock Inc., a brokerage firm. 'High rates had choked the economy. Now the Fed has turned its guns from fighting inflation to fighting recession.'"

Well, the market had indeed bottomed; not just for that cycle but forever, it would seem.

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I will have a brief piece next week on volatility. The following one, a report from the farm?as I will have spent some time in Iowa.

Brian Trumbore

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.